UK Regulators reveal ‘world’s toughest banker pay rules’

The new regime follows a year-long consultation by the City regulators and means that in cases of misconduct, bonuses for Britain’s most senior banking executives could be clawed back for up to a decade after they were awarded.

That compares with the current statute of limitations of seven years, which is already seen as one of the toughest banking pay frameworks globally.

The PRA and FCA also said they plan to ban bonuses for non-executive directors and for senior managers of any bank or lender that is bailed out by the taxpayer in the future.

A Treasury spokesman said: “The new rules will reinforce the link between pay and performance and ensure bankers are left in no doubt that their bonuses are at risk should any misbehaviour occur.

“The reforms the government has put in place since 2010 mean that Britain now has the toughest rules on bankers’ pay of any major financial centre.”

The new plans also extend the period over which bonuses must be deferred, to seven years for senior managers – three years longer than currently; five years for risk managers; and three to five years for all other “material risk-takers”.

Martin Wheatley, chief executive of the FCA, the remit of which is to regulate financial markets, said the new rules would help create an “accountable culture in the City” and was “a crucial step to rebuild public trust in financial services”.

However, Jon Terry, partner and pay expert at PwC, said banks headquartered in the UK would be concerned by the “uneven playing field that now exists between the UK and the rest of the EU”.

He said: “It’s helpful that the PRA has avoided lengthening deferral for more junior material risk takers, caught by the extensive European rules. This limits the impact on UK banks’ competitiveness overseas. However, the implications for UK banks’ competitiveness can’t be ignored. Although the PRA says they don’t want this to happen, it is likely that British banks will need to pay a premium to attract senior executives outside the UK, and more in fixed pay then their foreign competitors.

“Regulators are hoping the rules will help re-build trust in the City, but experience suggests that structural pay changes have limited impact on behaviour. We would encourage Regulators to focus on creating a positive culture in which ethical behaviour is a result of employees’ intrinsic motivation as opposed to fear of negative consequences.

“There has already been a move to greater fixed pay and less variable pay over the last few years in response to regulation and we expect this to continue. This will lessen the proportion of pay linked to performance.

“The new Code is silent on the matter of key concern for the asset management industry and smaller banks: whether the bonus cap (and other structural rules, such as minimum levels of deferral) will apply to them. Those firms will have an unwelcome period of uncertainty while they wait for the final European Banking Authority Guidelines later in the year, and the UK regulator’s response, to find out if they’ll be caught by the regulation or not.”